5 ms·

This article mentions the interest rates issue but glosses over it. Imagine two currencies ABC and DEF. They are at parity (ie 1 ABC = 1 DEF). ABC's central ba

by jmyeet 4y ago

This article mentions the interest rates issue but glosses over it. Imagine two currencies ABC and DEF. They are at parity (ie 1 ABC = 1 DEF). ABC's central bank has 10% interest rates. DEF's central bank has 1% interest rates. What happens? ABC strengthens against DEF just based on the interst rate differential. Why? Imagine if it didn't. You could borrow DEF 1B, convert to ABC, earn 10% interest and then pay it back later. If the exchange rate remains fixed, that would be a risk-free return of 9%. Because of that it doesn't happen. Think about it. This creates demand for ABC. Because of skyrocketing inflation, the Fed has raised interest rates. Europe has not [1] and really can't. Secondly, in uncertain times, there is nearly always a flight to the safety in financial markets, which usually means US Treasury bonds. This too creates demand for US dollars. So there are issues with th eEuro but really what you're seeing is a strong US dollar. This is a temporary situation. I'm not saying the energy issues in Europe aren't significant. They are. We can hope this creates pressure for a peaceful resolution to the war in Ukraine. This idea seems to make a lot of people angry like it means capitulating to Russia. Every conflict ends diplomatically (including WW2). Russia too is facing pressure to find a win and end the war as it's not sustainable long term so we're really in a game of chicken. Putin may be hoping a European winter (where the effects of an energy shortage will be more pronounced) will sway the odds in his favor. [1]: https://www.euribor-rates.eu/en/euribor-charts/ https://www.euribor-rates.eu/en/euribor-charts/

WaxProlix 4y ago
Can you explain a little bit about what you mean by the "...and really can't" line? Is this just because they lack some of the mechanisms of a true central bank as a shared entity across the eurozone, or something less obvious?
- Tsarbomb 4y ago
  I was wondering about this too. I'm in Canada and we've been raising our rate even more aggressively than the USA. What is stopping Europe?
  - pkaye 4y ago
    Italy and Greece have a lot of debt so raised interest rates means their payments go up a lot more. Since they are part of the euro and can't print their own money they have no easy options.
- nomorewords 4y ago
  The common explanation is that it will fuck up the countries with a high debt to GDP ratio, like Greece
- cko 4y ago
  I think it's because some of the member states are already heavily indebted with weak economies, like Greece and Italy. A recession caused by monetary tightening may be annoying for Germany or the Netherlands, but very bad for most of the southern European countries.
  - FabHK 4y ago
    This. Italy already pays 1.9 percentage points higher rates than Germany, and has 140% debt to GDP. If the ECB sharply raises rates, then Italy's debt might become unsustainable. The Economist notes: "The country probably cannot tolerate yields on its bonds much above 4%. Around that point, the goals [of the ECB] of price stability and defending indebted countries would become irreconcilable. Should interest rates surge, the euro area would look dangerously frail. " https://www.economist.com/leaders/2022/06/23/how-fighting-inflation-could-imperil-the-euro-zone https://www.economist.com/leaders/2022/06/23/how-fighting-in...
- jmyeet 4y ago
  > "...and really can't" So, a certain level of inflation is actually good. The general benchmark modern developed nations go for is 2-3%. High inflation can cause all sorts of problems even without getting into hyperinflation. Negative inflation ("defaltion") or even zero inflation causes problems too. Just look at Japan over the last 35 years to see this in action. Deflation promotes saving rather than spending such that there is less economic activity and this has a knock-on effect on creating unemployment. Side note: lack of consumer spending is a ticking time bomb for China thanks to having to fund your own retirement and the demographics caused by the One Child Policy. So 2-3% is really the sweet spot. It's also worth noting that countries that run deficits like inflation too as it decreases the real value of their debt. Central banks can contrl interest rates by setting the benchmark rate. For example, if the Federal Reserve offers 5% for US Treasury bonds (which are considered essentially "risk free") then why would a bank lend a business or you money at less than 5%? It's more risk for a lower return. This is monetary policy. So as you can imagine if someone can only borrow money at 20% vs 2% it will have an impact on economic activity. That's the point. In the US, high inflation is seen as being driven by demand outstripping supply so interest rates are a crude tool for reducing demand. That's why the Fed has been raising rates. The eurozone largely has the same inflation problem thanks to energy demand and housing but doesn't have the economic activity driving it. So if the ECB were to aggressively raise rates, the fear is this could cause a deep recession in the eurozone. So that's what I mean by "they really can't> The eurozone has the inflation but not the economic activity.
petre 4y ago
> This is a temporary situation You're quite optimistic. I fear this is a 1930 moment. By the end of the decade we might have a Nazi Russia, WW3, North Korea attacking the South, China taking advantage of the situation and invading Taiwan. Japan remilitarising and maybe becoming a nuclear power.
- jmyeet 4y ago
  > Nazi Russia I'm not sure if you're talking about Putin or after Putin. Putin is an autocrat in all but name already. It's unclear whta'll happen to Russia when Putin inevitably dies. It could plunge into chaos, which is a big risk of any cult of personality. But Ukraine has revealed that Russia's military is a paper tiger. Russia too is in decline (demographically). > WW3 So if we actually have nuclear war between major powers, it's over. There's really no point worrying about this happening because it's unlikely you can impact this outcome so you'll be better off just assuming it won't happen. > North Korea attacking the South I don't fancy their chances. Sure NK has a large standing army but they can barely feed themselves. Kim Jong-Un isn't an ideologue. If anything, he's Saddam Hussein, which is to say he's motivated by his material reality rather than, say, any kind of fundamentalism. Kim likes his luxuries. Attacking the South would invite his own personal ruin. The only way I see this as realistic is if NK will otherwise collapse. Is a collapsing NK really that much of a threat? I mean they could cause a lot of people to die but could they succeed? I somehow doubt it. Remember too that NK only really exists because China wants it to exist. China, like any major power, likes having buffer states between it and other major powers. The US is no exception here either. The US almost started wW3 over Cuba after provoking the USSR (ie Jupiter MRBMs in Turkey). China doesn't war on th eKorean peninsula. China likes things the way they are. Just how long would NK survive without Chinese support? Side note: it has been a huge failure of US foreign policy not to consider that Putin too would want a buffer to NATO. > China taking advantage of the situation and invading Taiwan What'll eventually happen with Taiwan is a big open question. China knows what a shitstorm it would be to invade. Success isn't guaranteed either. A small body of water can be a huge barrier to even large militaries. Only 17 miles separates England and france at the closest point and Nazi Germany could never cross it and invade. Had there been a land bridge, the UK would've absolutely fallen in 1940-41. No one has successfully invaded England by sea since 1066. > Japan remilitarising and maybe becoming a nuclear power. Japan is a declining power due in large part to demographics. Japan is a bit like the UK in that it is highly dependent on imports. It also has a major power in the form of China as a direct neighbour. I really doubt Japan is the will or even the means to become a major military power. I'm honestly way more concerned about the rise of fascism in the United States than anything you mentioned.
achenet 4y ago
> Putin may be hoping a European winter (where the effects of an energy shortage will be more pronounced) will sway the odds in his favor. Global warming. Checkmate, Putin.
- chrisco255 4y ago
  Winter is coming.
RandomLensman 4y ago
Well, uncovered interest rate parity would have DEF strengthen not ABC. There are indeed other mechanisms, e.g., currencies with higher interest rates experiencing higher demand, but that also has limits/doesn't hold strictly etc.
- danuker 4y ago
  Huh? Say you own DEF. Wouldn't you rather trade it for ABC to gain more interest?
  - RandomLensman 4y ago
    Would you really go into "broken currencies" with high interest rates, for example? The carry trade in FX, i.e., borrow in low yielding currency invest in high yielding currency is a classic trade, but it is not risk free. FX can move against you. Basically, uncovered interest rate parity says that the interest rate differential creates an offsetting effect in the FX rate. Empirically, that is a bit shaky/doesn't always manifest, there are debates on time horizon, etc., though. In short, FX not easy to predict.
  - kgwgk 4y ago
    The scenario was presented as follows: > ABC's central bank has 10% interest rates. DEF's central bank has 1% interest rates. […] You could borrow DEF 1B, convert to ABC, earn 10% interest and then pay it back later. If the exchange rate remains fixed, that would be a risk-free return of 9%. If you have now 100 ABC = 100 DEF you have the choice of getting in 1 year 110 ABC or 101 DEF. If ABC depreciates against DEF and in one year 1 ABC = 0.918 DEF both choices become equivalent.
origin_path 4y ago
> Every conflict ends diplomatically (including WW2) WW2 ended with Berlin being captured by the allies and Japan being nuked. How was that a diplomatic end to the conflict?
- jmyeet 4y ago
  How about the German Instrument of Surrender [1] and the Japanese acceptance of surrender terms [2]? [1]: https://en.wikipedia.org/wiki/German_Instrument_of_Surrender https://en.wikipedia.org/wiki/German_Instrument_of_Surrender [2]: https://en.wikipedia.org/wiki/Surrender_of_Japan#Occupation_and_the_surrender_ceremony https://en.wikipedia.org/wiki/Surrender_of_Japan#Occupation_...
  - hef19898 4y ago
    Weren't those unconditional? Hell, callong any of the two world wars being ended by dimplomacy is quite a strong argument...
    - jmyeet 4y ago
      You're trying to draw a distinction that doesn't exist. The Allies said to Germany they wanted unconditional surrender. The Germans agreed. Various terms were agreed to including the cessation of military operations (on both sides). This is, by definition, a negotiated agreement ie diplomacy. Putting the highly questionable ethics of the two atomic bombings of Japan aside for a second, these bombings like any military operation are ultimately a negotiation tactic.
      - origin_path 4y ago
        By that definition every war ever ends via diplomacy. It makes the claim meaningless.

by jmyeet 4y ago

WaxProlix 4y ago

Can you explain a little bit about what you mean by the "...and really can't" line? Is this just because they lack some of the mechanisms of a true central bank as a shared entity across the eurozone, or something less obvious?

Tsarbomb 4y ago
I was wondering about this too. I'm in Canada and we've been raising our rate even more aggressively than the USA. What is stopping Europe?
- pkaye 4y ago
  Italy and Greece have a lot of debt so raised interest rates means their payments go up a lot more. Since they are part of the euro and can't print their own money they have no easy options.
nomorewords 4y ago
The common explanation is that it will fuck up the countries with a high debt to GDP ratio, like Greece
cko 4y ago
I think it's because some of the member states are already heavily indebted with weak economies, like Greece and Italy. A recession caused by monetary tightening may be annoying for Germany or the Netherlands, but very bad for most of the southern European countries.
- FabHK 4y ago
  This. Italy already pays 1.9 percentage points higher rates than Germany, and has 140% debt to GDP. If the ECB sharply raises rates, then Italy's debt might become unsustainable. The Economist notes: "The country probably cannot tolerate yields on its bonds much above 4%. Around that point, the goals [of the ECB] of price stability and defending indebted countries would become irreconcilable. Should interest rates surge, the euro area would look dangerously frail. " https://www.economist.com/leaders/2022/06/23/how-fighting-inflation-could-imperil-the-euro-zone https://www.economist.com/leaders/2022/06/23/how-fighting-in...
jmyeet 4y ago
> "...and really can't" So, a certain level of inflation is actually good. The general benchmark modern developed nations go for is 2-3%. High inflation can cause all sorts of problems even without getting into hyperinflation. Negative inflation ("defaltion") or even zero inflation causes problems too. Just look at Japan over the last 35 years to see this in action. Deflation promotes saving rather than spending such that there is less economic activity and this has a knock-on effect on creating unemployment. Side note: lack of consumer spending is a ticking time bomb for China thanks to having to fund your own retirement and the demographics caused by the One Child Policy. So 2-3% is really the sweet spot. It's also worth noting that countries that run deficits like inflation too as it decreases the real value of their debt. Central banks can contrl interest rates by setting the benchmark rate. For example, if the Federal Reserve offers 5% for US Treasury bonds (which are considered essentially "risk free") then why would a bank lend a business or you money at less than 5%? It's more risk for a lower return. This is monetary policy. So as you can imagine if someone can only borrow money at 20% vs 2% it will have an impact on economic activity. That's the point. In the US, high inflation is seen as being driven by demand outstripping supply so interest rates are a crude tool for reducing demand. That's why the Fed has been raising rates. The eurozone largely has the same inflation problem thanks to energy demand and housing but doesn't have the economic activity driving it. So if the ECB were to aggressively raise rates, the fear is this could cause a deep recession in the eurozone. So that's what I mean by "they really can't> The eurozone has the inflation but not the economic activity.

petre 4y ago

> This is a temporary situation You're quite optimistic. I fear this is a 1930 moment. By the end of the decade we might have a Nazi Russia, WW3, North Korea attacking the South, China taking advantage of the situation and invading Taiwan. Japan remilitarising and maybe becoming a nuclear power.

jmyeet 4y ago
> Nazi Russia I'm not sure if you're talking about Putin or after Putin. Putin is an autocrat in all but name already. It's unclear whta'll happen to Russia when Putin inevitably dies. It could plunge into chaos, which is a big risk of any cult of personality. But Ukraine has revealed that Russia's military is a paper tiger. Russia too is in decline (demographically). > WW3 So if we actually have nuclear war between major powers, it's over. There's really no point worrying about this happening because it's unlikely you can impact this outcome so you'll be better off just assuming it won't happen. > North Korea attacking the South I don't fancy their chances. Sure NK has a large standing army but they can barely feed themselves. Kim Jong-Un isn't an ideologue. If anything, he's Saddam Hussein, which is to say he's motivated by his material reality rather than, say, any kind of fundamentalism. Kim likes his luxuries. Attacking the South would invite his own personal ruin. The only way I see this as realistic is if NK will otherwise collapse. Is a collapsing NK really that much of a threat? I mean they could cause a lot of people to die but could they succeed? I somehow doubt it. Remember too that NK only really exists because China wants it to exist. China, like any major power, likes having buffer states between it and other major powers. The US is no exception here either. The US almost started wW3 over Cuba after provoking the USSR (ie Jupiter MRBMs in Turkey). China doesn't war on th eKorean peninsula. China likes things the way they are. Just how long would NK survive without Chinese support? Side note: it has been a huge failure of US foreign policy not to consider that Putin too would want a buffer to NATO. > China taking advantage of the situation and invading Taiwan What'll eventually happen with Taiwan is a big open question. China knows what a shitstorm it would be to invade. Success isn't guaranteed either. A small body of water can be a huge barrier to even large militaries. Only 17 miles separates England and france at the closest point and Nazi Germany could never cross it and invade. Had there been a land bridge, the UK would've absolutely fallen in 1940-41. No one has successfully invaded England by sea since 1066. > Japan remilitarising and maybe becoming a nuclear power. Japan is a declining power due in large part to demographics. Japan is a bit like the UK in that it is highly dependent on imports. It also has a major power in the form of China as a direct neighbour. I really doubt Japan is the will or even the means to become a major military power. I'm honestly way more concerned about the rise of fascism in the United States than anything you mentioned.

achenet 4y ago

> Putin may be hoping a European winter (where the effects of an energy shortage will be more pronounced) will sway the odds in his favor. Global warming. Checkmate, Putin.

chrisco255 4y ago
Winter is coming.

RandomLensman 4y ago

Well, uncovered interest rate parity would have DEF strengthen not ABC. There are indeed other mechanisms, e.g., currencies with higher interest rates experiencing higher demand, but that also has limits/doesn't hold strictly etc.

danuker 4y ago
Huh? Say you own DEF. Wouldn't you rather trade it for ABC to gain more interest?
- RandomLensman 4y ago
  Would you really go into "broken currencies" with high interest rates, for example? The carry trade in FX, i.e., borrow in low yielding currency invest in high yielding currency is a classic trade, but it is not risk free. FX can move against you. Basically, uncovered interest rate parity says that the interest rate differential creates an offsetting effect in the FX rate. Empirically, that is a bit shaky/doesn't always manifest, there are debates on time horizon, etc., though. In short, FX not easy to predict.
- kgwgk 4y ago
  The scenario was presented as follows: > ABC's central bank has 10% interest rates. DEF's central bank has 1% interest rates. […] You could borrow DEF 1B, convert to ABC, earn 10% interest and then pay it back later. If the exchange rate remains fixed, that would be a risk-free return of 9%. If you have now 100 ABC = 100 DEF you have the choice of getting in 1 year 110 ABC or 101 DEF. If ABC depreciates against DEF and in one year 1 ABC = 0.918 DEF both choices become equivalent.

origin_path 4y ago

> Every conflict ends diplomatically (including WW2) WW2 ended with Berlin being captured by the allies and Japan being nuked. How was that a diplomatic end to the conflict?

jmyeet 4y ago
How about the German Instrument of Surrender [1] and the Japanese acceptance of surrender terms [2]? [1]: https://en.wikipedia.org/wiki/German_Instrument_of_Surrender https://en.wikipedia.org/wiki/German_Instrument_of_Surrender [2]: https://en.wikipedia.org/wiki/Surrender_of_Japan#Occupation_and_the_surrender_ceremony https://en.wikipedia.org/wiki/Surrender_of_Japan#Occupation_...
- hef19898 4y ago
  Weren't those unconditional? Hell, callong any of the two world wars being ended by dimplomacy is quite a strong argument...
  - jmyeet 4y ago
    You're trying to draw a distinction that doesn't exist. The Allies said to Germany they wanted unconditional surrender. The Germans agreed. Various terms were agreed to including the cessation of military operations (on both sides). This is, by definition, a negotiated agreement ie diplomacy. Putting the highly questionable ethics of the two atomic bombings of Japan aside for a second, these bombings like any military operation are ultimately a negotiation tactic.
    - origin_path 4y ago
      By that definition every war ever ends via diplomacy. It makes the claim meaningless.